The Federal Court’s decisions in Australian Securities and Investments Commission v Bit Trade Pty Ltd [2024] FCA 953 (ASIC v Bit Trade No 1) and Australian Securities and Investments Commission v Bit Trade Pty Ltd (No 2) [2024] FCA 1422 (ASIC v Bit Trade No 2) highlight the strict disclosure requirements which cryptocurrency trading businesses are bound to observe under the Corporations Act 2001 (Cth) (Act), specifically where such businesses offer margin trading facilities to customers.
These two judgments make clear the fact that the complexity of the regulatory regime will not be seen as an excuse for non-compliance, and businesses cannot sidestep their disclosure obligations by offering risk disclosures in forms other than what are required by statute.
Bit Trade Pty Ltd (Bit Trade) operates Kraken, a cryptocurrency trading platform where customers can purchase and sell digital assets. Between 5 October 2021 and 11 August 2023, Bit Trade provided 1,163 customers access to a facility through which the customers could receive extensions of margin, in the form of digital assets or legal tender, to purchase digital assets on the Kraken exchange (Margin Extension).
Under the terms of the Margin Extension, customers were required to keep a specified minimum of collateral in the form of legal tender or digital assets. Customers could receive a Margin Extension of up to five times the value of the collateral in their Kraken account. However, if the collateral level fell below the required minimum, assets purchased by the customer with the Margin Extension, or otherwise held in the customer’s Kraken account, could be liquidated by Bit Trade and applied towards repaying the Margin Extension or to restore the value of the minimum collateral. The Margin Extension could be made in cryptocurrency, Australian dollars or foreign currency. However, the same asset type had to be used for the making and repaying of the Margin Extension. For example, if the Margin Extension was provided in bitcoin, it could only be repaid in bitcoin.
ASIC commenced proceedings against Bit Trade, alleging that the Margin Extension could not lawfully be offered to customers without Bit Trade first making a Target Market Determination (TMD) under section 994B of the Act (which it had not done).
A TMD is a disclosure document issued by providers of financial products (before the issuing of any financial product) which describes the type of customer the financial product is appropriate for, taking into consideration the customer’s likely needs, objectives and financial situation. The TMD requirement is part of the design and distribution obligations under Part 7.8A of the Act (DDO Regime), the purpose of which is to promote a customer-centric approach in regulating financial service providers.
The key question to be answered in ASIC v Bit Trade No 1 was whether the Market Extension was a “financial product” to which the TMD requirement applied. It was common ground that the Margin Extension was a financial product in the form of a ‘credit facility’ as defined in regulation 2B(1)(a) of the Australian Securities and Investments Commission Regulations 2001 (Cth) (ASIC Regulations). However, regulation 7.8A.20(9)(c)(ii), when read in conjunction with regulation 2B(3)(a) of the ASIC Regulations, provides that a TMD is not required for credit facilities which do not involve a person incurring a deferred debt to another person or paying a debt owed to another person (TMD Exception). Bit Trade claimed that the Margin Extension fell within the scope of the TMD Exception.
The question in ASIC v Bit Trade No 1 of whether the Margin Extension fell within the TMD Exception hinged on whether a Margin Extension customer accrued a “debt”. Nicholas J relied on a conventional definition of debt, being “a sum of money which is now payable or will become payable in the future by reason of a present obligation”.1
A significant finding was that cryptocurrency is not “money”, and so an obligation to repay in cryptocurrency is not “debt”.2 Consequently, if the Margin Extension only provided for repayment in cryptocurrency, the TMD Exception would plainly apply.
However, this was not the end of the discussion, as the Margin Extension facility also allowed for repayment in Australian dollars and foreign currency. Whether foreign currency is considered money for the purposes of the definition of “debt” required further analysis.3 Nicholas J ultimately resolved this question by reference to the fact that a statutory demand may be made for an amount payable in a foreign currency, concluding in line with the view of Austin J in Daewoo Australia Pty Ltd v Suncorp Metway Ltd (2000) 48 NSWLR 692 that there is no “theoretical basis for contending that a claim for failure to pay foreign currency is a claim for damages rather than debt”.4
Bit Trade also submitted that there was no obligation for a customer to close their Margin Extension position, and so there could be no money payable in the future (and therefore no debt). Nicholas J dispensed with this argument by referring to the provision in Bit Trade’s Terms of Service that, in certain circumstances, a customer’s Margin Extension could be terminated and the customer would be obliged to pay amounts to Bit Trade.5
Nicholas J was therefore satisfied that the Margin Extension involved the accrual of debt and fell outside the scope of the TMD Exception.6 Consequently, Bit Trade had contravened s 994B each time the Margin Extension was issued to a customer without a TMD first having been made.
In ASIC v Bit Trade No 2, there was no dispute as to the sentencing principles that Nicholas J should apply. Two notable principles were referred to:7
Nicholas J noted the extensive timespan of contravention and the number of contraventions involved.8 He stated that the vast majority of the customers involved were most likely retail customers who the DDO regime is designed to protect. In his Honour’s view, the fact that many customers did not experience trading losses was beside the point – the key fact was that Bit Trade should not have made the Margin Extension available to them without first making a TMD.9
Bit Trade submitted that it had made other disclosures to customers disclosing the risks of the Margin Extension facility which served substantially the same purpose as the TMD, and that this should reduce the sentencing burden.10 Nicholas J stated that these forms of disclosure were frequently ineffective and the argument ignored the other important obligations associated with the DDO regime.11 Consequently, his Honour gave little weight to Bit Trade’s disclosures.
Bit Trade also submitted that the DDO regime was complex and untested, and this should weigh in favour of a more lenient sentence.12 However, Nicholas J noted that Bit Trade did not seek legal advice from lawyers experienced in the field before the DDO regime took effect. His Honour found that Bit Trade did not turn its mind to the requirements of the DDO regime before these were first drawn to its attention by ASIC, which pointed to a “seriously deficient compliance regime that is not explained by the complexity of the DDO regime”.13
Bit Trade submitted that its suggested penalty of $4 million was substantial and ample to achieve specific and general deterrence objectives.14 Significantly, Bit Trade stated that the penalty would be almost three times Bit Trade’s profit over the period of contraventions, and so would satisfy deterrence. Nicholas J gave little weight to this argument, noting that Bit Trade had made US$7.7 million in fees and interest as a result of having made the Margin Extension available to its customers (the vast majority of whom were retail clients)15 and also that Bit Trade’s parent company had annual net income of more than US $1 billion.16
Ultimately, in view of the above factors, Nicholas J arrived at a figure of $8.0 million, finding that this amount would achieve the object of deterrence without being oppressive.17
ASIC has indicated an appetite to pursue cryptocurrency trading businesses who fail to comply with their disclosure requirements. The Federal Court, in turn, has indicated that it will not give leeway to such businesses who rely on substandard disclosures in place of complying with their TMD applications.
The deterrent power of the sentence imposed, however, should be considered in light of the overall size of the corporate group of which Bit Trade was a part. It is perhaps doubtful that an $8 million penalty will be a significant deterrent to Bit Trade’s corporate group given its annual net income.
Whether or not sentences of this magnitude will be an effective specific or general deterrent to cryptocurrency trading businesses with significant international backing is yet to be seen.
The Corporate Crime and Investigations team at Lavan has extensive experience in respect of disclosure and compliance obligations under the Act. If you require advice in this area, please contact Cinzia Donald.
Thank you to Freya Surma-Litchfield, Solicitor, and Michael Pendlebury, Solicitor, for their valuable research and assistance with this article.
